Paying for college doesn’t have to be a burden for young people.
The sad truth is, a lot of new graduates are so worried about paying off student loans that they no longer enjoy the fruits of their labor. The average American owes around $20,000 in student loans. That’s a huge debt to take on.
Those who have jobs spend too much energy and money trying to make bigger monthly repayments, thinking that the faster they can pay off the loan, the easier their life will become.
But will it really make life easier?
For most people, it won’t. As a matter of fact, trying to repay loans quicker by making bigger monthly payments can even lead to more stress.
How so?
Consider this: John and Peter are trying to repay their student loans. Let’s say they have the same salary. The only difference is John makes bigger monthly payments and Peter makes minimum payments.
John is surely going to repay the loan a lot faster than Peter, so does that mean John has the better strategy in paying for college loans?
Not really. Making larger monthly payments will also mean John is left with very little cash each month. What will he use for bills? What will he use to have fun with friends, to go on vacation if he is left with little disposable income? What’s left to put into his retirement savings?
Peter, on the other hand, will have enough money left to do these things. Yes, it may take him longer to repay student loans, but he will also be able to enjoy and, eventually benefit from, his money.
So which one are you? John or Peter?
John may be debt-free quickly, but he’s definitely not going to enjoy the money he’s making unlike Peter, who can do whatever he pleases with his money. Remember that having a few extra dollars means more now that you’re still in your 20s as compared to when you’re older.
There are other reasons why you should only pay the minimum on your student loans each month.
- Making bigger payments will not increase your net worth. What does this mean for you? Although you’ll be debt-free a lot quicker, your money won’t increase.
- Student loans are considered “good debt” and make you eligible for tax deductions. You no longer get tax deductions the moment you pay off a student loan.
- You’ll be able to save and invest your money. This is good for your retirement savings.
There’s no reason to be in such a rush when paying for college loans. Paying for college should not be stressful. Pay only the minimum amount. That’s the best strategy in repaying student loans.
Editors Note: I only partially agree with this. If you feel that you can invest the money and earn a higher return then you should do so. If the debt is high interest then you should be paying it off as soon as possible because there is no upside advantage to having it.
I have to politely disagree completely. I think all debt is bad, even student loans. Although 20k in student loans is a lot, comparatively speaking it is not that much. I could’ve paid off my 23k in student loans in 3 years on a 38k salary living in LA. But I chose to go to grad school and now have a much larger burden. I still enjoy life, go on vacation, and throw whatever I can at my debt. I know once I am debt free (hopefully in 4 years), I will take that exact amount and divide it between emergency fund, savings, and retirement. This will definitely be increasing my net-worth! Paying the minimum increases the interest and most student loans these days have 6.8-7.9 interest. That’s a lot of money, which means the minimum is probably only paying the interest and not actually paying down principal. I know a lot of people who take your advice seriously and sometimes I wish I could as well. But I can’t wait to be debt free!
disagree wholeheartedly. I just paid off my student loans and now more of my money is mine to do whatever I want with!
Hmm interesting take on paying off student loans. I think you should do whatever you are comfortable with. If you know that paying more on your monthly payments and not being able to spend that much otherwise is something you can do for a few years, I say do it, because in the end you will be debt free faster and have paid less in interest. If not, then don’t, and just do the minimum payments.
In terms of any debt I think about whether I will be able to invest the money and earn a greater return compared to the interest I am paying. I dont have any student loans or CC debt but its what I did with our last car. We have a car loan for 1.49% for the simple reason that I can make more money investing that cash
I added a little note at the bottom of the post showing that I only partially agree with this strategy 🙂
Not all debt is bad debt. Time value of money is the first thing they teach you in any finance class. I’m confused when you say: “which means the minimum is probably only paying the interest and not actually paying down principal.” Unless you paid for school with a credit card, an interest-only isn’t available on student loans.
But, to your point, being debt-free is generally better than being in debt. I’m not sure why I felt like debating…
A healthy debate is fine 🙂 I am speaking from my experience only. I have 55k in debt to go at 7.9% interest. My minimum payments are about $700. Capitalized interest accounts for $400 per/mo, which leaves roughly $300 left to pay principal. If I was dropping only $300 on 55k, I’d never get out of debt. If I chose to do income based repayment, my payments would be $0 (and then I’d REALLY never pay it off) because I make so little money, but I am choosing to get out of debt sooner.
At your interest rate I would definitely be trying to pay it down. 🙂
Agreed. The last time I saw 7.9% was on the alcoholic beverage I was drinking when I decided it was a good idea to respond to your comment 🙂